Joy Fuhrman, DVM, MBA, CPA
Director of Finance and Operations
Since employee incentive plans do not motivate all employees equally, it is often difficult for practice owners to implement simple incentive plans that will motivate all staff while still protecting practice profitability. Just as each practice is unique in its culture and characteristics, so too are employee incentive programs in their structure and in the way they motivate employees. Designing an employee incentive program that best suits the needs of your practice and employees is essential to implementing an effective employee incentive program.
After reading this, you will learn how to develop strategies to create an employee incentive program that will motivate employees at all levels of the practice, regardless of job function or training. You will be able to use this information to develop realistic and attainable goals for your employee incentive program that will promote both employee success and practice profitability.
Why Develop an Employee Incentive Program?
An employee incentive program should encourage and motivate individuals to achieve. The primary goals of the incentive program are to promote and enhance efficiency, productivity, practice growth, individual and team performance, employee training and development, and cost control. Efficiency and productivity have direct impacts on revenues and on profits. When veterinary teams function at peak productivity with all members of the team contributing to efficient and effective work flow, the result is increased client satisfaction, improved patient care and happier employees.
Have you ever worked in a practice where there was one “bad apple”? One employee who had a negative attitude, a disrespectful tone, an unwillingness to be flexible regarding his/her job functions? How did this one employee affect overall team morale? Productivity? Workflow? Client satisfaction? A well-designed employee incentive program will not only motivate that one employee to improve their own performance but will also encourage them to work synergistically and respectfully within the team to support the overall team performance.
By the same token, have you ever worked in a practice where there was palpable tension between the “front” i.e. the customer service representative team and the “back” i.e. the technical team? Again, a well-designed employee incentive program will support and encourage crossover and interconnectedness between the various teams for the benefit of the overall practice.
Educating Your Team
First you need to educate your employees about revenues and expenses of the practice. Provide as much transparency as possibly regarding revenues, revenue growth, employee payroll costs, employee benefit costs and profitability. If you feel comfortable, be transparent about owners’ compensation and how this compares to employee compensation. Be forthcoming about the workload as well as the financial risks that are associated with being an owner of the practice. Most employees have no idea the expenses associated with running a veterinary hospital. They must understand how the revenues and expenses of the business directly affect them. Demonstrate how practice cash flows would be impacted if revenues decreased by 10%, if you hired one additional employee, or even if each employee worked a few hours of additional overtime. Help them to understand the importance of peak performance of the entire team and its direct impact on the financial stability of the business.
Once employees understand how revenues and expenses flow in and out of the practice, they must then be educated on how they contribute to income and how they can help control expenses. Help employees understand that encouraging clients to accept doctor recommendations is not about “selling”. Rather it is about educating the client as to what is in the best interest of their pet. Outline your commitment to their continued education. After all, better educated staff = better educated clients = better care for pets! Employees should also understand how they contribute directly to cost control within the practice. Discuss the break-even point for hospital operation—how much revenue does the hospital need to earn on a given day to cover its fixed operating costs, expense control—overtime, absenteeism, inventory control, reducing waste, proficiency and efficiency in performing tasks e.g. catheter placement, running lab tests etc.
Soliciting Input from Your Employees
Not all employees or employee teams are motivated equally. Just as employees need to understand their impact on practice revenues and expenses, so too do you need to understand your employees’ concerns about workload, practice culture, team morale, and compensation satisfaction. Have a frank and open conversation with your employees—either individually or in a group—so that you can get a good grasp of their perspective on the team’s and the practice’s well-being. If your employees do not feel comfortable discussing these issues with you, consider sending out an anonymous survey—SurveyMonkey is one tool that can allow you to accomplish this, or consider working with an outside consultant to keep employee responses confidential. Once you have a good understanding of what your employees’ “hot buttons” are, you will be in a better position to identify how they will best be motivated. For example, if employees feel as though certain team members are not sharing the workload but are still being compensated “top dollar” because of their longevity with the practice, outline how the incentive program will reward employees for their current efforts.
Designing the Program
Consider if you would like both full-time and part-time employees to be eligible. Also consider the “vesting” period i.e. how long does an individual employee need to be working at the practice before they are eligible to participate in the program. How will eligibility be impacted by time-off during the period? How will eligibility be impacted by performance? In general, the following are recommended for eligibility to the program:
- All regular full-time and part-time employees are eligible to participate. This does not include relief or temporary-hire personnel whether veterinarians or technical staff.
- Employee becomes eligible in the first full quarter after successfully completing the initial 90 days of employment.
- Employee must be an active employee during the entire quarter.
- Employee must receive an average score of 75% or better on quarterly performance review and must have had no verbal or written warnings during the quarter.
Determine how much to allocate:
This can be one of the greatest challenges in designing an effective employee incentive program because it needs to be high enough to appropriately motivate employees but should not be so high as to cripple the practice’s cash flows. Since staff directly impact both revenues and expenses, they should be motivated to grow both the top-line revenue and the bottom-line profits. An effective employee incentive program should be designed to incorporate both revenue and expense allocations.
Here is how you can best calculate a reasonable amount to allocate to your employee incentive program:
- Review your quarterly revenue growth over the past two to three years. Determine your minimum and maximum quarterly revenue growth and calculate an average.
- Using this data, set a quarterly revenue growth goal for the practice that will encourage increased revenue growth in the future. For example, if your practice has experienced historical average revenue growth of 8.6% per quarter, it is reasonable to strive for 9% quarterly growth and to set this as the level at which the employee incentive program will come into effect.
- Once this target increase is achieved, a percentage of the dollar amount of the increase is designated as the total incentive program “pool”. Typically, the recommend allocation is 10% of the increase be allocated to the pool.
B. Costs of Goods Sold:
Employees have direct impact on COGS through limiting waste, improving proficiency and ensuring that revenue is captured for all inventory items that leave the practice. An effective employee incentive program should therefore motivate employees to keep COGS to a minimum, or at least a historically achievable level. To do this, you will need to understand what your average COGS percentage has been over the past two to three years. For example, let’s assume an average COGS percentage of 20%. Once you have determined the total amount of the quarterly incentive “pool”, adjust that amount as follows:
- If your COGS for the quarter is over the historical average (20%) then adjust the incentive pool allocation by 1% for each percentage point over the 20% goal. For example, if the COGS for the quarter is 21%, then the allocation to the bonus pool should be 10%-1% = 9%.
- There is no adjustment if the COGS percentage is below the goal percentage.
C. Support Staff Compensation:
Employees also have a direct impact on staff costs through improved efficiency and therefore reduced overtime, as well as reductions in unnecessary sick time costs. Again, you will need to understand what your average support staff costs as a percentage of total revenues have been over the past two to three years. For example, let’s assume staff compensation costs as a percentage of total revenues is 21%. The total amount of the eligible quarterly incentive “pool” will then be adjusted as follows:
- If your staff costs for the quarter are over the historical average (21%) then adjust the incentive pool allocation by 1% for each percentage point over the 21% goal. For example, if the staff costs for the quarter is 23% (two percentage points higher than goal), then the allocation to the bonus pool should be 10%-2% = 8%.
- There is no adjustment if the staff cost percentage is below the goal percentage.
D. Other Expenses:
Some people advocate for an employee incentive program that uses Net Income Percentage as a determining factor in calculating the bonus pool. However, this metric includes expenses such as rent expense, over which employees have no control. Including these expenses in the calculation of the employee incentive pool may result in the perception that the program is unfair or inequitable. Including only those expenses over which employees have direct impact will allow them to feel as if they have influence over the amount of funds being allocated to the incentive pool.
Using the example of a 9% revenue growth target and a 10% allocation in revenue growth, the incentive program pool can be calculated as follows:
Dividing up the Pool
Once you have determined the amount to be allocated to the incentive pool, it will need to be divided up amongst the eligible participants. This will determine the maximum amount that an individual can earn. The actual amount that the individual employee will earn will depend on whether they are part-time or full-time and on their final performance evaluation score. Full-time employees are eligible for 100% of the amount allocated to an individual. Part-time employees are eligible for a prorated amount based on the percentage of full-time work they perform at the practice.
Performance Review / Scoring System
The total possible score an employee can earn is 100%. Both the employee and the manager/supervisor complete the review form and a discussion of the results with a focus on goal setting follows. For a performance review to be meaningful and worthwhile, the reviewer and the employee must be honest and forthcoming in their evaluations. The review is to be professional, accurate and meaningful. After discussion of the review findings and establishment of goals for the quarter, if score adjustments are agreed upon and deemed necessary, make note of the changes and why the changes occurred. The review should only cover current performance i.e. how the employee performed in the most recent quarter. This will ensure that employees who have been with the practice for a long time are not favorably biased for their longevity if their performance and commitment starts to wane. By the same token, a new employee who is demonstrating great initiative, willingness to learn and is well liked by the team, could score a higher percentage on the performance review. The score from the employee’s self-review and manager’s review will be averaged together to determine the employee’s final score. The employee’s final score equates to the percentage of the individual bonus amount allocated.
Completing the Example
Continuing with the example above and assuming the practice has 10 eligible employees, the maximum bonus that can be earned by any employee is $461 in the first quarter, $633 dollars in the second quarter, $0 in the third quarter, and $572 in the fourth quarter. The incentive bonus payout for the following four employees for the fourth quarter is calculated as follows:
Implementing a simple but effective employee incentive program can motivate employees while still protecting practice profitability. Through appropriate employee education, careful design of the incentive program and regular, meaningful employee reviews, you can grow your practice revenues and profitability, while allowing your employees to have a sense of appreciation and understanding of how their efforts contribute to practice success.
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